RBI concerned over Basel III implementation

MUMBAI: The Reserve Bank on Monday said the domestic banks will have to further shore up their capital base once the Basel III norms kick in, even though there will be no immediate effect on them, given their already higher capital base and limited leveraging of balance sheets.

On the macroeconomic impact of the enhanced Basel II capital and liquidity norms, RBI, quoting the FSB-BCBS Macroeconomic Assessment Group report, says if higher requirements are phased in over four years (as is being planned), each one percentage point rise in bank's actual ratio of tangible common equity to risk-weighted assets (CAR) will lead to a 0.20 per cent drop in GDP.

"This implies that the annual growth rate would be reduced by an average of 0.04 percentage points over a 4.5 year period, with a range of results around these point estimates. On the other hand, a 25 per cent rise in liquid asset holdings would affect output by less than half than associated with a one-percentage point increase in capital ratios.

The projected impacts arise mainly from banks passing on higher costs to borrowers resulting in a slowdown in investment," RBI pointed out in its statutory Report on the Trend and Progress of Banking in 2009-10, released here on Monday.

The central bank further explained that with a supervisory monitoring period up to end December 2012, the phased implementation would start from January 1, 2013. Along with the global liquidity standards, these reforms which are expected to fully meet the core requirements of the global financial reform agenda will be presented to the forthcoming Seoul G-20 Summit this month.